Measuring Financial Health

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By WSJ. Custom Studios

What does it mean to be financially healthy? Those two words—financial health—contain many factors, from the weight of our debt load and how we manage cash flow, to how well we can weather an unexpected financial shock and more. Much like someone’s physical health, it’s quantifiable yet enormously complex.

That complexity means financial services providers—from banks and credit unions to nonprofits and fintech startups—occasionally struggle to best serve their customers. How can you help improve financial lives if the specifics remain a mystery?

That question was why the Chicago-based nonprofit Center for Financial Services Innovation (CFSI) set out to crack the financial health equation.

“Financial health isn’t just a problem of the poorest of the poor or a problem of those who are unbanked or underbanked—it’s actually a problem of the majority of Americans."

Rob Levy, a managing director of CFSI

“Clearly, there are a number of challenges here: Some of them are policy challenges, some of them are economic, and then some of them are ways in which the financial services industry could be doing better. And the only way we can know if they’re doing better is to measure how their customers handle finances in the first place.”

CFSI started by separating financial health into four components: saving, spending, planning and borrowing. It then measured each component using two indicators. With saving, for instance, CFSI defined financial health by customers having both short- and long-term liquid savings or assets. With planning, it pointed to adequate insurance coverage and future-oriented behavior, such as using a budget or setting up automatic payments.

“The measurement is fairly universal,” Levy says. “But what the measurement leads financial services providers to do actually varies quite a bit. You may realize that customers are struggling with their need for basic transaction accounts, and so you decide to launch a new kind of prepaid card or low-cost checking account. Or you might see that folks are having trouble with their credit scores, so you offer some kind of secure credit card or credit-building loan. There are a lot of options that providers can offer, and different providers are going to have different solutions.”

Levy says 45 million Americans lack a credit score—and 50 million to 70 million more have a poor rating.

CFSI’s own research describes 57 percent of Americans as struggling financially, while financial services providers attempt, post-recession, to re-establish themselves as stewards of financial betterment.

A test group of eight financial providers, applying CFSI’s approach using surveys, transactional data or both, has already begun to take steps to better help customers. Wright-Patt Credit Union, based in Beavercreek, Ohio, discovered that 62 percent of its customers were struggling financially—but within that group, 42 percent were close to achieving financial health and only needed a little extra help to get over the hurdle. With that knowledge, the credit union made a plan to create a new financial wellness program, with financial coaches who reach out to customers to assess their finances in depth, then develop a plan for moving forward.

For CFSI, the financial-health journey is undertaken not only by customers but also by financial institutions. For its next project, CFSI plans to help financial services companies orient themselves on the path to better serving their customers, with the four components of financial health—saving, spending, planning and borrowing—guiding the road ahead.

“I actually think this is a unique way of thinking about how companies start to make the shift from being focused solely on dollars to including consumer outcomes and financial health,” CSFI’s Levy says. “It starts with simply understanding the overarching consumer challenge, moving toward diagnosis of their own customers’ financial health, then ultimately designing and delivering better products with an eye toward constantly tracking and improving upon those products.”

Milwaukee-based Guaranty Bank, which participated in CFSI’s beta round, wanted to compare its products and services with customers’ needs in light of their financial health, and then find a way to fill any gaps.

Founded in 1923, Guaranty describes itself as a bank that will “go where other banks don’t” and remains committed to its original goal of helping hardworking families improve their financial health. Many of Guaranty Bank’s customers are low- to moderate-income, and some are new to banking. A sweep of transactional data and a survey addressing financial health indicators helped the bank identify where customers were struggling most—primarily saving and planning, but also accessing credit.

“I think a lot of customers need a better sense of the tools that are available to them,” says Molly Thiel, Guaranty’s executive vice president of retail banking.

Now, Guaranty plans to develop a suite of innovative savings products in an effort to get customers excited about the prospect of growing their finances. With CFSI’s help, it’s also taking a deeper look at its transactional data, correlating findings with the survey results to get an even more detailed picture of its customers’ financial health.

“You have to work at a micro level in order for it to be really meaningful,” Thiel says. “I need to be able to sit down with customers who are interested in improving their financial health, and then prescribe a set of activities to help them do that. The transactional data can help show correlations between their ability to improve their financial health and their use of a particular product or service. Then, with confidence, I can set them on the right path.”